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Ethnic divisions, political institutions and the duration of declines: A political economy theory of delayed recovery

Richard Bluhm and Kaj Thomsson

No 2015-003, MERIT Working Papers from United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT)

Abstract: This paper analyzes the duration of large economic declines and provides a theory of delayed recovery. First, we develop a formal political economy model that illustrates a simple mechanism of how weak constraints on the political executive can lead to longer declines in ethnically heterogeneous countries. The model shows how uncertain post-recovery incomes and a winner-take-all threshold effect create a commitment problem rendering a cooperative equilibrium inaccessible. Holding out can benefit groups by reducing the threshold effects in subsequent periods, thus limiting the remaining uncertainty. Placing strong constraints on the executive solves this commitment problem by reducing the uncertainty from the threshold effects, which brings about cooperation earlier on. Second, we then test several empirical predictions from the model using standard data on linguistic heterogeneity and more detailed data on ethnic power configurations. We find that the partial correlations are consistent with the proposed theory. The effect of executive constraints on the length of declines is very large in heterogeneous countries, but practically disappears in ethnically homogeneous societies. The adverse effect of heterogeneity is driven by the number of groups; increasing political concentration works in the opposite direction.

Keywords: Economics of Minorities; Races; Immigrants; Migration; Non-labor Discrimination; Institutions and Growth (search for similar items in EconPapers)
JEL-codes: J15 O15 O43 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-gro and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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